ISLAMABAD, June 5: Pakistan’s explicit and implicit contingent liabilities are projected to cross Rs75 billion during the year 2003-04 that could pose a budgetary gap of 1.34 per cent of GDP.

This fiscal hole of 1.34 per cent would be over and above the GDP growth target of 4 per cent. These contingent liabilities include Rs15.54 billion explicit and Rs59.56 billion implicit liabilities, says an annexure of the economic survey 2002-03 released on Thursday.

Contingent liabilities are costs which the government will have to pay if a particular event occurs. These are obligations triggered by a discrete but uncertain event. Relative to government policies, the probability of a contingency occurring and the magnitude of the required public outlays are exogenous (such as natural disasters) or endogenous (such as implications of market institutions and government programmes for moral hazard in markets).

Contingent liabilities have, therefore, not been recognized as direct liabilities. However, contingent government liabilities are associated with major hidden fiscal risks. A common example of a contingent liability is a government guaranteed loan. At the time a guarantee is entered into there is no liability for the government, since this is contingent on the borrower failing to repay the loan as contracted.

However, in the event of default, the lender can invoke the guarantee and the government will be obliged to repay the amount of the loan still outstanding. At that point, the contingent liability will become an actual liability of the government, and a payment must be made.

These liabilities support specific policy objectives by creating financial incentives, without an immediate financial outlay. However, when these contractual guarantees or non- contractual commitments are realized, the government faces significant fiscal costs at the expense of other outlays.

Thus analysis of country’s fiscal position is incomplete if it skips obligations made by the government outside the budget.

Contingent liabilities grow with weaknesses in the financial sector, macroeconomic policies, regulatory and supervisory system, and information disclosure.

Explicit Contingent Liabilities are specific government obligations defined by a contract or a law. The government is legally mandated to settle such an obligation when it becomes due. These include guarantees for borrowing and obligations of provincial governments and public or private entities, umbrella guarantees for various loans (SME loans, agriculture loans), guarantees for trade & exchange rate risks, guarantees for private investments and state insurance schemes.

Implicit contingent liabilities represent a moral obligation or expected burden for the government not in the legal sense, but based on public expectations and political pressures.

These include defaults of provincial governments and public or private entities on non-guaranteed debt and other obligations, liability clean-up in entities being privatized, bank failures, disaster and relief financing, failure on other non-guaranteed funds.

The explicit contingent liabilities legally oblige government to make a payment if a specific event occurs. Because their fiscal cost is invisible until they are triggered, contingent explicit liabilities represent a hidden subsidy, blur fiscal analysis, and can drain future government finances.

Nevertheless, the government guarantees and financing through government guaranteed institutions are more politically attractive than budget support even if they are more expensive later on.

Implicit contingent liabilities are not officially recognized until a failure occurs. The triggering event, the amount at risk, and the required government outlay are uncertain.

These include government’s quasi-fiscal activities including mainly the bail-outs of strategically important State Owned Enterprises and the non-performing loans of banking sector.

Through robust financial sector reforms, prudent monetary management and strengthening of State Bank of Pakistan’s regulatory role, the non-performing loans of the banking sector stand at Rs266 billion as on December 2002. These were Rs258 billion as on June 30, 2002 and Rs279 billion as on June 30, 2001 respectively.